INSITE Corporation produces advanced analytic software for computer simulations called "Model It". Based on a regression analysis of product sales in the first year after launch, INSITE's marketing department estimates the demand for "Model It" to be:
Q_M = 1,200 - 8P_M + 4P_S with adjusted R²= 0.65, and with all of the above coefficients statistically significant. Here, Q_M denotes units sold of "Model It" software, P_M denotes "Model It's" price, and P_S denotes the price of a best-selling statistical software package (with both prices in dollars).
(a) Currently, P_M = $200 and P_S = $300. What is the predicted demand for "Model It" software? The price P_S has been unchanged (at $300) during the last 6 months. Given this information, write down the equation for "Model It's" demand curve (with Q_M as the left-side variable). Also determine its inverse demand curve (with P_M as the left-side variable).
(b) An industry analyst comments that demand for “Model It” is not very sensitive to changes in the price of the statistical software package PS. (This package does perform some of the same operations as “Model It,” but not as quickly or conveniently.) Carefully assess this contention. Do you agree or disagree?
(c) As is true for many information goods, the marginal cost of producing Model It is negligible. However, the company incurred significant costs in developing the product for market (estimated to be about $350,000). Given the estimated demand of part (a), determine the optimal price and quantity for “Model It”.
(d) A marketing department analyst realizes that a potentially important determinant of demand for “Model It” software is the price of computer workstations. the regression model and now includes the price of workstations along with the other variables. The new model differs from the original regression of part (a) in the following ways: The adjusted R² increases from 0.65 to 0.78. The coefficient of PM changes from -8 to
-10, while the coefficient of P_S is essentially unchanged. The new regression coefficient for PW (the workstation price) has a negative sign. Finally, all three price coefficients are highly significant.Is the new regression equation an improvement over the original? In the new regression,Q_M is observed to be more sensitive to changes in PM than in the original regression. Explainwhy this might be the case?

Serial Correlation Occurs When

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